Expect 25 bps cut in Q3 of FY15-16: CARE Ratings

Monetary Policy Review by CARE RatingsMonetary Policy – August 2015Delivering to market expectations, the Reserve Bank of India kept the repo rate unchanged at 7.25%. This is similar to CARE’s forecast of no change in the key policy rate for this policy announcement.

Highlights

- Policy repo rate under the Liquidity Adjustment Facility (LAF) is unchanged at 7.25%.

- Therefore, reverse repo stands unmoved 100 bps lower than the repo rate at 6.25% while the Marginal Standing Facility (MSF) rate remains 100 bps higher than the repo rate at 8.25%.

- Cash Reserve Ratio (CRR) of scheduled banks is also unchanged at 4% of net demand and time liabilities (NDTL).Liquidity front

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- Continue providing liquidity under the overnight repos at 0.25% of bank wise NDTL at the LAF repo rate and through 14-day term repos and longer term repos of up to 0.75% of NDTL of the banking system through auctions.

- Continuation of daily variable rate repo and reverse repo auctions to ensure smooth management of liquidity.

RBI’s Macro OutlookGrowth:The RBI maintained its growth outlook despite downgrades in the global projections. Weak commodity prices could favor real incomes although much needs to be done in ease supply constraints. The projected output growth for 2015-16 has been retained at 7.6%.

InflationUncertainty due to inflationary pressures, uneven monsoon and possible actions of the Federal Reserve has caused the RBI to maintain its accommodative stance.

CARE’s ViewRBI’s policy rationale and announcement are in line with CARE’s views.

Inflationary apprehension remains. The uneven monsoon effect on kharif harvest pose an upside risk to inflation.

A further rate cut by the Central Bank could be likely in H2-FY16 provided inflation treads along the predicted path.

We hold on to our GDP expectation of 7.8-8% for FY16 based on assumptions of a recovery in investment and manufacturing growth.

DisclaimerThis report is prepared by the Economics Division of Credit Analysis &Research Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report.

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